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Will the Bank of England be shaken?

Eurozone

The euro continues to decline both under the influence of internal causes, such as slowing economic activity and weak inflation, and under the influence of external factors, namely the rate of strengthening of the US dollar, which is a direct consequence of a number of foreign policy steps taken by Trump.

Germany does not yet show signs of overcoming some slowdown in the economy. The volume of production orders in March fell by 0.9% while year on year growth slowed from 3.5% to 3.1%. The growth of industrial production slightly exceeded forecasts. Exports and imports for the month of March, in contrast, were worse than forecasts.

It is a day off today in Germany, so the market is more subtle than usual and can react to the outcome of the meeting of the Bank of England.

On Friday, Mario Draghi will perform. The preliminary plan of his speech is not connected with monetary policy. However, some comments may be sound. At the moment, most macroeconomic indicators for the euro area look rather weak and some slowdown is a reality. This gives the ECB the right to somewhat soften the rhetoric but the plan to reduce the asset repurchase program continues and will be curtailed in any case.

At this time, there is no reason to expect a reversal of the euro. Only verbal intervention by Draghi is possible. For example, he can announce the temporary nature of low inflation and for a number of objective criteria, the euro will continue to fall. A decrease to 1.1550 is the most likely development of events in the short term.

United Kingdom

Until recently, the markets were confident that the Bank of England at the meeting in May will raise the rate by a quarter of a point, responding to high inflation and labor market improvements. However, the latest macroeconomic data show that the UK economy is far from all so bright. The GDP growth rate in the first quarter was only 0.1%, PMI is steadily declining, and many indices point not to the economic growth, but to its slowdown.

Of course, not everything is bad. Unemployment has decreased from 4.4% to 4.2% since the last meeting and wage growth rates again look quite confident, but still, these are not enough to confidently predict a rate hike.

Most experts point out that they are waiting not for the cancellation of BoE plans, but only for their transfer to August, when the third extended meeting this year will take place.

The pound today may be in a state of increased volatility. If the rate is not raised, then most likely, there will be a limited reduction of the pound to 1.3490, followed by a lateral withdrawal. If the Bank of England still surprises the markets and the rate increases, then the reaction will be super-volatile and unpredictable, as the markets simultaneously will evaluate new forecasts for inflation and GDP, which, most likely, will not be too optimistic.

Oil

The decision of Donald Trump to exit the nuclear deal with Iran led to a sharp rise in oil prices. The cost of the July contract for Brent came close to $78 per barrel, and this is obviously not the limit.

The reason is simple: Iran produces almost 4 million barrels per day, being the third largest OPEC member by production, and it is logical that the next steps of the US administration will be aimed at creating obstacles to the sale of Iranian oil in the market by putting pressure on buyers. This threat forced France and Germany to distance themselves from the US and maintain their participation in the deal, but could they resist the pressure? In this, there are serious doubts.

The development of the situation may provoke OPEC + to soften the terms of the agreement somewhat. If such chances are significant, we will learn about them long before the OPEC + meeting in June. Meanwhile, quotes continue to grow, and is expected to reach $80 per barrel in in the short term.